Monday, January 2, 2012

Individual Stocks: The Best Investment Over the Long Term

From the book “Stocks for the Long Run” by Jeremy J. Siegel---

Best performing S&P 500 firms, 1957-2006;

Altria (Philip Morris): return of 19%
Abbott Labs: return of 15%
Crane Co.: return of 15%
Merck: return of 15%
Bristol-Myers Squibb: return of 15%
PepsiCo: return of 15%
Tootsie Roll: return of 15%
Coca-Cola: return of 15%
Colgate-Palmolive: return of 14%
Others, all around 14% include; Heinz, Pfizer, Wrigley, P&G, Hershey, Kroger and CVS.

Short term, these may not move a lot, but holding them over the long haul can yield big results. These may not be the most "sexy" stocks, but long term they give great results. For these you need to take more of a buy and hold attitude, as embraced by Warren Buffett, as opposed to a buy and homework attitude, like Jim Cramer.

$1,000 in Philip Morris in 1957 would be worth $8.25 million in 2006. This is 50 times the accumulation in the S&P 500 index. The S&P is “safe” but you can make much more if you take risks. Individual stocks will pay more than index funds. I'd have some moral objections to investing in a company that makes cigarettes, but that is just my point of view.

Often times index funds, matching the return of the S&P 500 or the Wilshire 5000 will do better than mutual funds.

Historically, stocks have returned 6.8% after inflation over the last 200 years. The average P/E (price to earnings ratio, or multiple), is about 15. These returns will double the purchasing power of your portfolio every decade. With inflation at 2-3%, stock returns range between 9 and 10% per year. This doubles the value of your portfolio every 7 to 8 years.

It is a bull market if the economy is doing well, it's a bear market if the economy is struggling. Jim Cramer says: “Bulls make money, bears make money, but pigs get slaughtered.” In other words, you can make money if the market is going up or down, but do not get greedy.

Have cash as part of your portfolio, especially in a bear market. Buy stocks that pay dividends if you can (P&G pays a good dividend). It’s the dividends that make stocks outperform bonds. Stocks have yielded the best return over the long run. Bonds are less, gold is less than bonds. Precious metals prices will generally go in the inverse of the stock market. (Stock market low/metals high and vice versa).

Diversification means that no sector (a sector may be automotive stocks, or healthcare stocks, or bank stocks) is more than 20% of your portfolio. Don’t put all of your eggs in one basket. If one sector struggles, your whole portfolio will not go down the drain.

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